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No longer can individual managers track their employees’ incentive pay in spreadsheets. Under the terms of Section 956, banks are required to create a centralized view of who is being paid how much and why. They must also be able to provide this information to federal regulators through specific reporting requirements and demonstrate that existing compensation arrangements do not incent behaviors by individuals or teams that place the institution at risk.

Luckily, banks do not have to reinvent the data management wheel to comply with Section 956. They can leverage existing packaged Sales Performance Management (SPM) solutions to provide an integrated incentive compensation management platform across the enterprise. Developed primarily to manage compensation programs for sales reps and others with variable pay arrangements, many leading SPM solutions are flexible and powerful enough to support incentive compensation arrangements across large, multi-national institutions with disparate lines of business.

SPM tools, when implemented properly, can provide a unified, systematic, and auditable platform for enterprise-wide incentive compensation management. Additionally, they can offer greater visibility into enterprise-wide decision making, and global consistency with local flexibility in rewarding specific talent markets and critical workforces.

Regulation? Try Automation

The ink from President Barack Obama’s signature on the Dodd-Frank law had not dried before banks began to realize there was a big gap between what Section 956 required of them, and what they could actually deliver with existing capabilities.

Contrary to the way the banking industry’s compensation programs are sometimes portrayed in the media, banks do not just incent Wall Street traders. They regularly offer many employee groups incentives to achieve performance goals. These groups range from local branch managers, to loan officers, to credit card servicing, to financial planners, and even to tellers (who are often incented to refer clients to other services within the bank.) The list goes on.

The problem is that many financial institutions do not currently have the capabilities necessary to report on incentive compensation plans and policies across the enterprise in a synthesized way that is acceptable to federal regulators. Regulators remain concerned about the risk created by incentives across business units (for example, the interrelation of incentives paid to a mortgage originator and the trader on the subprime securitization desk) while banks frequently design and administer incentives at a business unit level without the ability to look across business units.

The post-Dodd-Frank regulatory environment requires a more unified, effective approach. Banks should now consider developing an integrated, flexible, enterprise-wide compensation governance structure to assess current practices, the systems which support them, and performance and risk data against regulatory reporting requirements.

SPM solutions—which are already partially deployed as point solutions at many banks—can help accomplish this objective. Consider this example: A mortgage broker at a particular bank branch finalizes a $300,000 home loan. All of the information for the transaction is in the bank’s enterprise systems. An SPM solution takes all the transaction data, the information on the loan officer’s incentive plan, and all other relevant information from dozens of sources across the enterprise, and aggregates in one location. A rules engine within the SPM solution then accesses the firm’s risk assessment systems to confirm the loan is acceptable under federal regulations and institutional guidelines for incentive compensation for this transaction and, if so, the level of compensation.

SPM solutions can facilitate this same automated workflow across the enterprise, simultaneously aggregating data on thousands of daily transactions, tracking regulatory compliance, and creating audit trails for incentive compensation plans and payments. Specific to Dodd-Frank compliance, they can apply advanced analytics to aggregated data to create greater data transparency and generate the detailed reports that regulators now require.

Beyond facilitating regulatory risk compliance, SPM tools offer banks an economic benefit: improved efficiency. The business case for SPM packages has traditionally focused on reducing administrative costs, improving the time-to-market for incentive-based compensation plan changes, providing greater transparency into incentive-based compensation plans, and providing detailed sales performance analytics. All of these reasons remain valid, and indeed SPM solutions are currently deployed in many lines of business at some of the world’s largest financial institutions. Those firms that adapt most effectively to the regulatory changes could gain a competitive advantage by reducing unnecessary costs, improving productivity, and becoming more flexible and efficient in their compensation administration processes.

Going Forward with SPM

Dodd-Frank requires sophisticated and far-reaching reporting capabilities in order to meet the requirements of Federal Regulators. These capabilities differ from previous incentive compensation reporting in that they cross lines of business and link credited risk to compensation. Failure to have such capabilities could easily result in massive administrative costs, providing inaccurate information to federal regulators, or in an inability to demonstrate conclusively that the institution is managing risk appropriately.

While many of the large financial institutions likely use automated systems for incentive compensation management for a portion of their business, few have end-to-end, cross-functional area programs to support capture of relevant data that support monitoring and analysis. Fortunately, a combination of process alignment and existing, tested technology packages can reduce the administrative costs these regulations impose, while adding value by supporting future compensation program requirements more effectively than the fragmented, manual processes commonly used today.

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